The Right of First Refusal (“ROFR”) and the Right of First Offer (“ROFO) is a very powerful right giving its holder the power to force a sale or transfer of an interest in a particular property (which can be almost anything from real estate to businesses to personal items).
Right of First Refusal
Right of First Refusal (ROFR) gives the holder the right to review all other offers on the property. It gives the holder the right to have a last look at all offers. This is also why ROFRs are also known as the “last look” right. With this last look, the holder of the ROFR can then force the sale or transfer of the property to the holder by simply matching the offer (which is usually the best or highest offer). Third parties who become aware of a ROFR will generally hesitate to make an offer knowing that another can simply match and take the property. This is why ROFRs favor the holder as all they need to do is match that best or highest offer to force the sale or transfer to the holder.
Right of First Offer
On the other hand, a Right of First Offer (ROFO) generally favors the owner/seller. A ROFO gives the holder the right to make the first offer to the seller. There is usually a time period within which the ROFO must be made to the seller or the ROFO expires. The seller can accept and reject. The seller is also free to shop around the offer to others, obtain a better offer and then go back to the holder of the ROFO and see if the holder will match the better or higher offer. These are some reasons why ROFOs generally favor the seller.
As reflected in the below, despite the initial favoritisms of ROFRs and ROFOs there are pros and cons that the holder should consider:
Pros and Cons of Right of First Refusal
ROFR:
- The seller generally acts first by getting offers from third parties, which can give the holder time to consider what to do.
- The holder does not have to ascertain the market, but rather just needs to match the last best and highest offer.
- Third parties will hesitate to make an offer knowing that the holder of the ROFR can take the property by simply matching their offer.
- Third parties knowing there is a ROFR could make an offer to which the holder cannot match (which then switches the favoritism towards the seller).
- The ROFR does not go away until the holder rejects to match the last best and highest offer.
Pros and Cons of Right of First Offer
ROFO:
- The holder has a limited time period to make the offer.
- The seller is not obligated to accept the offer.
- You can negotiate upfront the ROFO selling price.
- The parties know each other versus potential additional paperwork, disclosures, and notices if a third party buyer was involved.
There are other pros and cons with the ROFR and ROFO. Those strategic points are highlighted depending on whether you are the seller or holder/buyer.